Simplifying GAAP: Development Stage Entities
Companies frequently complain that U.S. Generally Accepted Accounting Principles (GAAP) have become increasingly complex, adding compliance costs that sometimes outweigh benefits to stakeholders. The Financial Accounting Standards Board (FASB) has responded with ongoing “simplification initiatives.” Recently, the board removed its incremental financial reporting requirements for development stage entities.
Goodbye, development stage entities
On June 10, FASB issued Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The update removes incremental financial reporting requirements for new businesses in the development stage, including those whose principal operations haven’t yet commenced or begun to generate significant revenues.
The update eliminates the requirements for development stage entities to:
- Present inception-to-date information on the statements of income, cash flows and shareholder’s equity,
- Label the financial statements as those of a development stage entity,
- Disclose a description of the development stage activities in which the entity is engaged, and
- Disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.
Also eliminated is the guidance that describes the conditions for determining when a development stage entity is the type of off-balance-sheet vehicle known as a variable interest entity (VIE). FASB said the change will lead to more consistent reporting by companies when they determine whether an investment in a new business is a VIE that should be consolidated onto their financial statements.
The presentation and disclosure rules currently required under Accounting Standards Codification (ASC) Topic 915 will no longer be effective in fiscal years that begin after Dec. 15, 2014. Public companies will apply the revised accounting for consolidated reporting a year later. Privately held businesses will apply the revised accounting for consolidated reporting for fiscal years that start in 2017. Companies can adopt the changes before the effective date, however.
Cost savings won’t be the only benefit from the elimination of development stage entity reporting requirements. “The update should also help foster more consistent consolidation analyses and decisions among public and private development stage entities, thereby improving the relevance of information provided to users of financial statements,” says FASB Chairman Russell Golden.
Keep it simple
The latest round of changes and proposed changes is just a small part of FASB’s ongoing simplification efforts. This movement is supported by accountants and finance executives who want easier rules to follow, as well as investors and lenders who welcome more reader-friendly financial statements. Stay tuned for more information.